Practical collection alternatives in non-lien situations

There are few things more frustrating than not getting paid for services or goods provided to a customer.

It is especially frustrating when the amounts owed are fairly modest since small delinquent accounts can add up to a hefty sum and affect cash flow. Plus, a provider of services or goods should be paid for what it has delivered. So, what are the options for obtaining payment from a delinquent customer?

First, consider whether the amount is worth pursuing. As a lawyer, I am often told that the quickest way to get sued is to myself sue a client to recover a debt owed for services provided. Thus, before undertaking collection action against a delinquent customer, consider whether the account is a “problem” account that has a heightened risk for a claim. If so, it may be better to forgo a collection action and “hold” the balance owed on the account as possible leverage, or an offset, in any future adverse action.

For all delinquent accounts, it is also likely best to wait to pursue a collection action until the statute of limitations for negligence or a malpractice claim has run its course. Filing a collection action after the statute of limitations for the negligence claim has expired should reduce your exposure to such a claim. For this reason, it’s always a prudent step to learn the applicable statute of limitations in one’s state for each of these types of claims before undertaking collection action, particularly in a “problem” matter.

Having a clear and concise written agreement with a customer setting forth the terms and conditions that govern the services or goods provided will improve your chances of success. An agreement of this sort can also provide the right to recover attorney fees, collection-agency fees and collection costs incurred in collecting on a delinquent account. It can also establish where a lawsuit must be filed and could be used to limit liability to a customer.

Depending on the amount owed, the venues for a collection action can either be a small-claims court, where the parties would represent themselves, or an in-state district or circuit or superior court. In the latter forum, a corporation or a limited-liability company will most likely need to be represented by a lawyer.

Rather than pursue the claim yourself, you could tender a delinquent account to a collection agency. Most agencies operate on a contingent-fee basis, so only the hard costs associated with collection must be paid.

Although paying a contingent fee can be unpalatable, it’s worth remembering: 75 percent of something is better than 100 percent of nothing. Indeed, in some instances, employing a collection agency can be a preferable alternative to paying an attorney an hourly rate to pursue collection.

Among the considerations you should take into account when deciding whether to use a collection agency or an attorney: the amount at issue (a higher amount disfavors a contingent-fee arrangement); the likelihood of collecting the amount owed (lower collectability favors a contingent-fee arrangement); and whether the matter will be “hotly” contested (if yes, a contingent-fee arrangement is usually better because litigation costs are higher). In any event, hiring a third party to handle the collection matter is usually a better business decision because it allows you to spend your time running your business rather than sitting in small-claims court.

Once a court enters a judgment against a delinquent customer, the most popular (and usually least expensive) means of collection is a writ of garnishment. A writ of garnishment, generally speaking, allows money to be “taken” from a customer’s bank account or paycheck to pay off debts.

The issuance of a writ of garnishment, whether successful or not in “hitting funds,” often persuades a customer with assets to pay off debts to avoid further collection action. Of course, if the customer has no assets, the judgment may not be worth the paper it is printed on. Regardless of the states you do business in, the old adage is true – you can’t get blood from a stone.

William Fig is a partner in Sussman Shank’s litigation and construction practice groups in Portland, Ore. Contact him at 503-227-1111 or wfig@sussmanshank.com.